Exploiting a link between farm debt and soil erosion to aid US farmers.

September 5, 1984

By Harlan C. CliffordHarlan C. Clifford is a researcher at the Rocky Mountain Institute, a nonprofit energy and resource policy research group in Old Snowmass, Colo. Last of three articles. The first appeared on July 31. The second appeared Aug. 15.

Old Snowmass, Colo.

Today, America's agricultural cornucopia is threatened. At a time when gross farm income, agricultural production, and agricultural exports are at record highs, the United States faces a rising tide of farm bankruptcies and foreclosures. Throughout the country, increasing numbers of farmers are unable to pay their debts or obtain the added credit they need to continue operating.

At the same time, mismanagement of farm land and water supplies is producing soil erosion both at greater rates and over a larger area than during the Dust Bowl of the 1930s. The resources upon which agriculture depends - soil and water - are being consumed at an unsustainable rate. We are living not off the ''interest'' of the land, but off the ''capital.''

A few key elements have been prominent in contributing to the quagmire in which the nation's agricultural sector finds itself.

Steady economic base

Until the early 1970s, farmers had a relatively steady economic base. From 1965 to '71, gross farm income rose an average 5.5 percent annually, while debt service and production expenses together grew by 3 percent annually. This resulted in 2.5 percent average annual growth over the same period in net farm income - that is, profit.

These relatively steady growth patterns changed dramatically with the first Soviet grain sale in 1972. From '72 to '73 net farm income jumped an astounding 77 percent - from $18.9 billion to $33.4 billion. Simultaneously, as farmers coaxed more grain from their fields and began to cultivate new, less-productive land, expenses shot up from an average annual 6.7 percent growth rate before '72 to 19 percent between '72 and '81.

Two economic changes were particularly significant.

From 1972 to '73, gross farm income increased 25 percent in one year and continued to grow at a faster rate than before the first Soviet grain sale. At the same time, land values began to rise. The early '70s saw the beginning of a decade-long inflationary period, during which the paper value of farm land soared. Land comprises the majority of farmers' equity, and the more equity farmers hold, the more money they can borrow.

Farm-asset value increased roughly 14 percent a year between '67 and '72, from $234 billion to $303 billion. But between '72 and '81 that rate nearly doubled, to 25 percent a year. Farm assets in '81 were worth $983.3 billion; of that amount, real estate made up $760 billion, or 77 percent.

Suddenly, bankers found farmers an attractive risk. Rapidly growing gross income and equity value, coupled with burgeoning export markets, gave farmers access to capital for expansion. In 1982, farmers held debts totaling about 20 percent of their equity, just as they had in '67. But debt has grown, as farm equity has increased - from $40 billion in '67 to $182 billion in '82.

None of these changes would have been a problem, except that net farm income did not grow at a similar rate. Between 1972 and '82 farm income available to service debt rose 91 percent, while debt increased 238 percent. (In constant dollars, net income after debt service over the same period dropped more than 40 percent.) Purchases of expensive new machinery and growing amounts of fertilizers and pesticides added heavily to this debt burden; although farmers were growing more on their land, the costs of that increased production were high, rising from $52 billion in '72 to $142 billion nine years later. A lot of money has been passing through farmers' hands, but not enough has been staying there to pay off their liabilities.

With farmers squeezed by debt, US agricultural productivity is being threatened, because the short-term financial interests of farmers do not agree with the long-term interests of society. The best interests of our society lie in practicing sustainable agriculture - protecting soil and water resources for future generations.

But as farmers struggle to ease debt pressures, they squeeze every possible dollar from their land, a practice that has led to today's unprecedented rates of soil erosion.

The US possesses some of the most fertile land in the world, which, if properly managed, can indefinitely yield prolific harvests. Essential to this productivity is topsoil. Soil and water conservation techniques such as terracing, contour plowing, ditch lining, efficient irrigation, and fallowing can preserve topsoil, and have been known and practiced for decades. Such techniques, however, cost money. Many farmers cannot afford to let fields occasionally lie fallow when they could be producing income every year. Terraces and contours are costly to build, they remove land from production, and often require more time and energy to cultivate. Many modern farm machines cut a swath so wide that they cannot negotiate the turns required in a contoured or terraced field; as a result, the farmer plows out the soil-retaining structures.

Most farmers understand and regret the long-term loss in productivity caused by soil erosion. But faced with the necessity of servicing large debts, few farmers can afford the luxury of husbanding the land for their grandchildren.

The US is currently losing 4 billion tons of topsoil annually to erosion, equal to 1 percent of the total existing topsoil in 1977.

Productivity on some of the most fertile lands is dropping significantly because of erosion. The link between soil loss and declining crop yields is well known and documented among farmers, researchers, and policymakers, who generally agree that it is undesirable. Yet erosion continues and indeed worsens in most areas.

Government policymakers have long recognized the importance of the agricultural industry to the nation, and have worked in various ways over the years to help farmers.

Impact of price supports

One of the most controversial forms of assistance is price supports. The specifics of support programs vary, but they all serve to provide farmers with unlimited markets for their produce. The government purchases farm commodities that cannot be sold on the open market at or above the US Department of Agriculture's (USDA) guaranteed price. Consequently, the department has accumulated vast stockpiles of grain and dairy products.

This practice also excludes potential buyers (such as third-world countries) who might be able to purchase present surpluses below the artificially high floor price. While some of the food may go to foreign aid, a great deal is stored, at additional taxpayer expense.

Storage has become such a problem that the government has recently tried giving food away; cheese and butter have been passed out to low-income families. Of much greater magnitude is the USDA's payment-in-kind (PIK) program. In an attempt to reduce agricultural production, Agriculture Secretary John Block instituted a program whereby farmers would let a certain percentage of their land lie fallow in exchange for ownership of government-held grain surpluses from previous harvests.

The farmer ''harvested'' from government stockpiles an amount equal to a percentage of what he would have reaped had he planted the fallow acreage. He then sold that ''harvest'' on the market.

Numerous problems have accompanied the PIK program, including spoiled grain and higher feed prices for livestock farmers. In addition, some farmers plowed up marginal land they had no intention of farming, then claimed they were ''setting it aside'' in order to garner PIK payments.

The most significant problem of all price-support programs has been the cost.

Last year the federal government laid out a whopping $18.9 billion just to purchase crop surpluses; nevertheless, it has been estimated that 10 to 20 percent of grain farmers are in deep financial trouble today.

Although current price-support programs provide some income assistance to beleaguered farmers, the parallel growth in farm failures and government farm aid programs suggests that current practices are not going to solve farmers' problems. At the moment, policies tend not to consider the entire picture. The Soil Conservation Service (SCS) struggles to convince farmers they should practice conservation techniques, while the Commodity Credit Corporation (CCC) continues to purchase surpluses produced by unsustainable farming.

The PIK program began to address the broader agriculture picture, but is generally felt to have created more problems than it solved. And every election year we hear clamorings about ''the farm problem.''

Farm debt &amp; soil mismanagement

The problems of farm debt and soil mismanagement are inextricably linked. In order to solve them, policymakers should acknowledge and play upon the connections between these problems, instead of treating each one in isolation.

The key elements to consider are high farm debt; rising debt-service costs; low net farm income (falling in real terms); the high number of farm bankruptcies; increasing rates of soil erosion; overproduction; and unlimited markets created by price support programs.

The object of any successful policy must be to break the vicious cycle in which many American farmers seem trapped.

High levels of debt lead to a need for increased cash flow, which demands greater crop production, which requires more from the land. Land abuse reduces soil productivity, thus requiring more and costlier fertilizers and other petroleum-based inputs. These increase production costs and reduce net income, thus raising debt levels while reducing the farmer's ability to service them.

To break this cycle, the USDA must create an arrangement that links government farm aid with good farm conservation practices.

At the same time, price supports must be diminished and farm production exposed more fully to market forces. The artificial markets created by price supports have greatly inflamed debt and erosion problems; these ''shadow markets'' must be done away with if we are to keep the present situation from recurring.

But price supports are all that stand between many farmers and foreclosure. Exposing the agricultural industry to market forces beyond what it now experiences could create a catastrophic shakeout, given the tenuous position of many farms.

Present trends indicate we are moving toward an inevitable market adjustment; we should use available means to make that adjustment gradual and to cause it to take place when farmers are financially stronger. USDA policies can facilitate these changes. Farmers can be strengthened and exposed to market forces by phasing out price supports over several years, channeling the money saved to individual farmers to service their existing debt.

Even today, agriculture is the basis of every society, as it has been since man first turned the ground. America's cornucopia should not be taken for granted, especially at a time when food production in a growing world is becoming increasingly important. Failure to alter the current course will lead the US to more farm failures, higher food prices, larger, less-effective federal payments to farmers and, eventually, a diminished ability to feed ourselves and other nations from an exhausted, degraded land. Appropriate change in federal policy can result in a secure, sustainable farm economy for the indefinite future.

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